1 Technological Efforts and Export Behavior of IT firms in India K. Narayanan * and Savita Bhat † Abstract: This paper attempts to examine the role of technological efforts in determining the export behavior of firms belonging to the IT industry in India. Technological efforts considered in the study are investments on in-house research and development; import of capital goods; imports of designs, drawings and formulae against royalty payments; and intra-firm transfer of technology through foreign equity participation. Export behavior is considered in terms of decision to export and export intensity of exporter. The results confirm that efforts on import of technology, via both arms length and intra-firm modes, positively determine the export behavior of the firms in the IT industry. Firm size and skilled workforce are also important in explaining exports in this industry. Keywords: Technological Strategies, Competitiveness, Exports, Information Technology, Developing Countries, India JEL Code: F14, L1, L63, L86. * Professor, Department of Humanities & Social Sciences Indian Institute of Technology Bombay, Mumbai 400076 INDIA E-mail: [email protected] Fax: 91-22-2576-4350 † Senior Lecturer, Madras School of Ecconomics, Chennai, INDIA E-mail: [email protected]
21
Embed
Technological Efforts and Export Behavior of IT firms in India
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
1
Technological Efforts and Export Behavior of IT firms in India
K. Narayanan* and Savita Bhat
†
Abstract:
This paper attempts to examine the role of technological efforts in determining the export
behavior of firms belonging to the IT industry in India. Technological efforts considered in the
study are investments on in-house research and development; import of capital goods; imports of
designs, drawings and formulae against royalty payments; and intra-firm transfer of technology
through foreign equity participation. Export behavior is considered in terms of decision to export
and export intensity of exporter. The results confirm that efforts on import of technology, via
both arms length and intra-firm modes, positively determine the export behavior of the firms in
the IT industry. Firm size and skilled workforce are also important in explaining exports in this
industry.
Keywords: Technological Strategies, Competitiveness, Exports, Information Technology,
Developing Countries, India
JEL Code: F14, L1, L63, L86.
* Professor, Department of Humanities & Social Sciences Indian Institute of Technology Bombay, Mumbai 400076
INDIA E-mail: [email protected] Fax: 91-22-2576-4350 † Senior Lecturer, Madras School of Ecconomics, Chennai, INDIA E-mail: [email protected]
2
Technological Efforts and Export Behavior of IT firms in India
1. Introduction
In the past few years, India has been witnessing substantial growth in the economy, largely
driven by the export oriented information technology (IT) industry. The IT industry is also
providing employment opportunities to a large number of people in India (Arora and Athreye,
2002). However, Indian IT sector is now facing increasing competition from countries such as
China and Philippines. Thus, in the long run, this export led growth would be sustainable only if
the industry keeps pace with the rapid technological changes taking place in the world IT sector.
In literature, the role of technological efforts in determining competitiveness of firms is well
established. Inter-country difference in technological capabilities is an important determinant of
the direction of trade (Posner, 1961; Vernon, 1966; Krugman, 1979). The evolutionary theorists
(Nelson and Winter, 1982; Dosi, Pavitt and Soete, 1992) assert that these differences emanate at
the level of the firm itself, which eventually accumulates into inter-country differences in
capabilities. Some of the recent empirical evidences based on the evolutionary theoretical
approach (Patibandla and Petersen, 2002; Siddharthan and Nollen, 2004; Bhaduri and Ray, 2004;
Narayanan, 2008) too suggest that continuous technological up gradation in the firm is important
for keeping the IT industry in India competitive.
This paper attempts to examine the effect of technological efforts on export behavior of firms
based on a more recent sample from the IT industry in India. The technological efforts are in the
form of in-house research and development, import of capital goods, imports of design, drawings
and formulae against royalty payments, and intra-firm transfer of technology through foreign
equity participation. Unlike earlier studies on export competitiveness of IT sector in India
(Kumar and Siddharthan, 1994; Bhaduri and Ray, 2004; Siddharthan and Nollen, 2004;
Narayanan, 2008), the present study will follow a methodology suggested by Wakelin (1998),
Sterlacchini (1999), and Basile (2001) to deal with the censored data sample. Thus, in this study
we define export behavior of the firms in two forms, namely, the probability to export, and the
export intensity of the exporter firm. Using the likelihood ratio test as suggested by Wakelin
(1998) and others, we compare the Tobit model to the Double Specification model (Probit +
3
Truncation) and find that the Double Specification model is more appropriate and robust for the
present study.
The Prowess database provided by Center for Monitoring Indian Economy is the source for the
balanced panel data. The sample period considered is from 2000 to 2005, a period of economic
growth in India. For the purpose of the study, we have extracted firm level data for 155
companies of Information Technology industry incorporated before the year 2000. The sample
contains data on 19 hardware, 127 software, and 9 service firms.
The following section gives an overview of the IT industry in India. Section 3 looks into the
potential determinants of exports as given in the literature. Section 4 describes the sample,
methodology, and the model. Section 5 carries out the empirical analysis and the last section
deals with the summary and conclusions of the study.
2. IT Industry in India
The IT industry started in India in 1960s. Initially International Business Machines (IBM) and
ICL (International Computers Limited) were the two giants in Indian IT industry. The Indian
government at that time wanted to achieve self-sufficiency in various industries including
computers and electronics. The government put forth policies, such as participation of Indian
nationals in ownership and control of foreign computer subsidiaries and use of domestically
procured inputs to the maximum extent with foreign units fulfilling only complex and large
technical needs. This resulted in IBM leaving India and ICL splitting its operations into a
manufacturing unit having 40% Indian ownership and a sales unit with no Indian involvement.
In 1975, Burroughs (US) entered into joint venture with Tata Consultancy Services (TCS) to
export software and printers. By the end of the same year, the government gave monopoly power
to newly established Computer Maintenance Corporation (CMC) to maintain all foreign
computer systems. By late 1970s, Indian firms, such as Hindustan Computers Limited (HCL),
DCM Data products and Operations Research Group (ORG) that designed and assembled
systems, and International Data Machines (IDM) that marketed and serviced Microsystems,
entered the IT industry. However, over the years, due to the protective policies of Indian
4
government and lack of competition, the IT industry in India became technologically backward
in comparison to the world.
During 1980s, with the aim of modernizing the Indian IT industry, the government brought out
policies to promote exports of software and computer peripherals. It also permitted import of
mainframes and supercomputer. In 1984, Department of Electronics (DOE) announced new
computer policy to help manufacturing of latest technology computers at international
comparable prices. Imports of both components and know-how were liberalized at low duties to
support domestic hardware manufacturers (Parthasarathy, 2005). In the year 1986, DOE
announced Software Export Development and Training Policy. Soon, the import duty level was
reduced to 60%, which was subsequently cut to 25% in 1992. Income tax exemption of 100%
was announced on profits from software export. Due to lenient regulations in late 1980s,
production shot up by 100% while prices fell to 50% and slowly computers became affordable.
As the value of internet was recognized, lot of encouragement in the form of tax incentives,
infrastructure, free licensing to ISPs (internet standard protocol), permission to lay cables or
setting up gateways, etc were given to the industry. Software Technology Parks were set up in
the 1990s to provide duty free imports of capital goods, high-speed data communication links
and tax holidays for 10 years. In the year 2000, the IT Act was enacted. This Act underscores the
legal infrastructure for e-commerce and e-governance in India (see Basu and Jones, 2005 for
details).
The IT industry in India can be broadly divided into IT enabled services and e-businesses,
software products, and hardware. The IT software and services have a large export market with a
small domestic component as well. The IT enabled service industries like call centers, back
offices, etc. have also shot up from the small beginning in early 90s with American Express,
British Airways and GE. A major bottleneck in many cities like Bangalore, Mumbai, and
Hyderabad is lack of infrastructure. Furthermore, generally, the trained workforces have to be
retrained by the companies to keep up with the advances in the industry.
5
Table 1 shows the value of production in India for various constituents of hardware and software
during 2000-01 to 2005-06. Figure 1 depicts the hardware and software production (in
percentages) in graphical form. As is clear from Table 1, consumer electronics, and equipments
and components form the major portion of hardware production. In India, higher value of
software is produced as compared to hardware. The share of software production in the total IT
production has been continuously increasing over the past few years (see Figure 1). Of the total
software produced more than 75 percent has been for export market. The share of export-
oriented software in total software production is also increasing gradually over the past few years.
Table 1: Value of IT industry Production during 2000-01 to 2005-06 periods (Rupees in
Crore) (with Percentage Share of Total IT production for Subtotal (Hardware) and Subtotal
(Software), Percentage Share of Total Software Production for Software for Exports in
d t-statistics in parenthesis for Tobit results, and z-statistics in parenthesis for Probit and Truncated Results a, b, c, represent statistical significance at 1%, 5%, and 10% level respectively
Larger firms and firms investing more on skilled employees are more likely to export. The large
firms in this industry such as Infosys Technologies Limited, Wipro Limited, Satyam Computer
Services Limited, H C L Infosystems Limited, Tech Mahindra Limited are also well established
16
firms who have been in export business for quite some time. These are also the firms that are
able to retain their high skilled employees through high salary and wage packages. It should be
noted that the authors did carry out estimation for a reduced sample by excluding the three
largest firms, that is, Infosys Technologies Limited, Wipro Limited, and Satyam Computer
Services Limited. However, the statistical significance of the variables in the Double
Specification model was not affected by dropping observations corresponding to the largest three
firms from the sample.
As was expected, a software or service firm is more likely to export as compared to a hardware
firm. Age of the firm and availability of internal finance does not affect the decision to export for
a firm in this industry. With support from the government, even the young firms are able to have
outward orientation from their very inception.
5.2.2 Factors affecting the export intensity
Of the four technology variables, three, namely, import of capital goods, import of designs,
drawings, and blueprints, and foreign equity participation favorably affect the export intensity of
the exporters (Table 5). Unlike the findings of Siddharthan and Nollen (2004), in the present
study, which is based on a more recent data set, import of capital goods has a statistically
significant positive sign in determining export intensity. Most of the technologically active firms
in this study are involved in relatively higher end products and services such as providing
business and technological solutions, producing domain specific tools, and developing software
packages that are compatible with the latest available hardware. Hence, by importing the latest
hardware, these firms are able to provide more contemporary and efficient products and services.
As Kumar (2005) too notes that the established Indian companies are now trying to export more
sophisticated, higher value-added software and services.
Foreign equity is favorably affecting the export intensity of the exporters. This finding is in line
with that of Siddharthan and Nollen (2004) for an earlier sample period from IT industry in India.
In the new millennium too, the exporting firms in this industry are able to take advantage of
intra-firm transfer of technological, managerial, and marketing capabilities from the foreign
equity participants for better performance in the foreign markets.
17
In the present study, coefficient of R&D takes an unexpected negative sign in truncation model
explaining. Zhao and Zou (2002) too, in the case of Chinese manufacturing industry, found
export intensity of the exporters to be negatively affected by R&D activities. It was suggested
that import-substituting R&D undertaken by the Chinese firms, aimed at capturing domestic
markets rather than export market, was responsible for this unexpected result. In the case of IT
industry in India too, firms with high R&D intensity during 2000-2005, such as Odyssey
Technologies Limited that provides products for information security and Ramco Systems
Limited (part of Ramco Group) that provides enterprise solutions and services, mainly cater to
the needs of well-known domestic clients. At the same time, many other IT firms that have
invested on in-house R&D, such as Infosys Technologies Limited, Wipro Limited, and
Flextronics Software Systems Limited (earlier Hughes Software Systems Limited), are
multinational companies (MNCs) with overseas production facilities. It is quite possible that the
in-house R&D undertaken by these firms are for the benefit of their overseas production units
rather than for improvement of the products and services that they offer in the form of exports.
Larger size of the firm is favorable for decision to export as well as export intensity of exporters.
As duplication of IT products and services is not very difficult, large turnover brings down per
unit cost of production, and hence increases their export performance. Higher relative
investments on skilled employees also favorably affect the export intensity. Many of the software
and service providers in India have obtained ISO 9001 and Capability Maturity Model (CMM)
standards’ certifications. This implies that the firms in the industry have acquired skills for
efficiently undertaking complex projects (Arora et al, 2001), a factor that can attract large foreign
clients.
Software and service providers are likely to export at higher intensities than hardware providers.
Many of the software and services firms in India have overseas marketing offices, development
centers, and subsidiaries. These help the firms in capturing large foreign markets. Hardware
providers in India such as VXL Instruments Limited, T V S Electronics Limited, D-Link (India)
Limited, and Zenith Computers Limited mainly cater to the needs of domestic market. Although,
many of the hardware firms are now trying to get into exports by providing services, some firms
18
like VXL Instruments Limited have remained in hardware sector and formed joint ventures with
firms in foreign countries to capture overseas markets.
Age of the firm is not important for the export intensity of the exporters. In an industry where the
product life cycle is very short, the experience gained over time is not likely to give extra
advantage to the older firms in export market unless they keep updating their technological
knowledgebase. However, the result of the Tobit model suggests that younger firms have
advantage in export market as compared to the older firms. Profit margins of the firm also do not
seem to affect the export intensity of the exporter. With various other sources of funds such as
venture capital being available for the standard IT software and services (Arora et al, 2001),
profit margins is may not turn out to be that significant for export competitiveness of the IT firms
in India.
6. Summary and Conclusions
The present study attempts to investigate the inter-firm differences in the effects of technological
efforts on the export behavior of the firms in the context of IT industry in India. The export
behavior of the firm is defined in terms of two aspects, the decision to export and the export
intensity of exporter. Likelihood test suggests that Double Specification model (Probit +
Truncation) is more appropriate for the present sample. The following points emerge in the
present study.
First, in line with the findings of other empirical studies such as Siddharthan and Nollen (2004),
in this study too technological efforts are important as determinants of export behavior of IT
firms. Import of technology through arms length purchases and the managerial and technical
expertise of foreign promoters and collaborators help the IT firms to keep pace with the rapidly
changing IT technology in the world so that the firms are able to provide relatively higher end
products and services, such as business and technological solutions, to their international clients.
However, to sustain exports in the long run, there is a need to encourage in-house R&D in the
emerging areas of the IT industry so that the firms provide original products and services rather
than simply solutions to the problems posed by the international clients.
19
Second, large size of the firm positively influences both the decision to export as well as the
export intensity of the exporters. The firms in this industry can reap the benefits of economies of
scale, as duplication of IT products and services is easy. By helping the small firms in this
industry to network with others, including larger firms, one can ensure that the small firms are
also cost-effective from their very inception.
Third, skilled employees improve the export performance of the firms in this industry. With
many of the Indian IT firms obtaining ISO 9001 and CMM certifications, one can admit that the
IT employees in India have software development and project management skills. However they
may still be lacking the entrepreneurial ability to foresee up-coming areas in IT where new
products can be developed. The knowledge of the latest developments in the IT industry can be
imparted to the skilled workforce through regular training sessions so that they can contribute
towards innovative product and process development.
Fourth, the incentives provided by the Indian government have encouraged even the young firms
to become exporters from the beginning itself. In the light of increasing competition from
Chinese and Philippines firms, there is a need to continue providing support to the innovative
young software and services firms in terms of tax incentives and infrastructure support.
Thus, unlike other studies on IT industry in India, the present study analyzes a more recent
dataset using a more appropriate methodology to understand the export behavior of the IT firms
in India. The paper suggests that technological up gradation through imports is important to
sustain the export competitiveness of the IT industry in India. However, in future, with the
reduction in the technological gap between India and other developed countries, production of
unique products and services through in-house R&D efforts is likely to become more important
for export competitiveness of the firms in this industry. In the light of increasing competition
from other developing country firms, the study reveals a need to encourage the firms to
continuously put in efforts on in-house R&D and skill enhancement that can enable the firms to
foresee and develop products and services in the emerging areas of IT industry.
20
References
1. Aggarwal, A, (2001), ‘Liberalisation, Multinational Enterprises and Export Performance:
Evidence from Indian Manufacturing’, Indian Council for Research on International
Economic Relations (ICRIER) Working Paper No. 69.
2. Arora, A, Arunachalam, VS, Asundi, J and R Fernandes (2001), ‘The Indian Software
Services Industry’, Research Policy, 30, 1267-1287.
3. Arora, A and S Athreye (2002), ‘The Software Industry and India’s Economic Development’,
Information Economics and Policy, 14, 253-273.
4. Basile, R. (2001), ‘Export behaviour of Italian manufacturing firms over the nineties: the role
of innovation’, Research Policy, 30, 1185-1201.
5. Basu, S and R Jones (2005), ‘Indian Information and Technology Act 2000: Review of the
Regulatory Powers under the Act’, International Review of Law Computers & Technology,
19(2), 209-230.
6. Bhaduri, S and AS Ray (2004), ‘Exporting Through Technological Capability: Econometric
Evidence from India’s Pharmaceutical and Electrical/Electronics Firms’, Oxford
Development Studies, 32(1), 87-100.
7. Dosi, G, Pavitt, K and L Soete (1992), The Economics of Technical Change and International
Trade, Brighton: Harvester-Wheatsheaf.
8. Fagerberg, J (1987), ‘A Technology Gap Approach to Why Growth Rates Differ’, Research